Unsustainable

Article excerpt

With the U.S. economy enjoying a record 112th month of expansion, the "galloping globalists" can be forgiven a bit of triumphalism. But behind the glowing economic numbers--low inflation, high employment, expanding GDP--lurks a darker number: the trade deficit. It keeps growing and growing.

And that means trouble.

By recent standards, the dismal U.S. trade figures for April 2000 counted as a relief. After all, imports fell slightly, and this helped narrow the trade deficit for the first time since August 1999.

So much for the good news. Now for the bad: At $30.4 billion, the April deficit was just fractionally below the record $30.6 billion deficit set in March. That makes it the second-highest deficit ever. Worse, the narrowing trade gap in April was evidently no more than a temporary aberration, reflecting an all too brief easing of world oil prices for a few weeks in the spring. The underlying trend remains worrisome--far worse than almost anyone has noticed.

Just how bad is it? Awful. That April figure is 60 percent higher than the April figure of a year ago. Even if oil prices don't rise any further, America's current account deficit--which is the broadest measure of America's trade deficit with the rest of the world--is on course to approach 4.5 percent of gross domestic product this year. By comparison, the worst the deficit ever ran in the 1980s--which, remember, was supposed to be a truly terrible time for American trade--was 3.6 percent of gross domestic product.

Comparing today's trade deficit with the then-shocking deficits of 1971 and 1972 is even more telling. The deteriorating trade balance in the early 1970s was considered so serious by August 1971 that it forced the Nixon administration to make the historic--and deeply humiliating--decision to abandon the dollar's gold convertibility. (The Nixon administration's idea, at least in part, was that if the dollar floated against other currencies, the dollar's value would fall, making exports cheaper and imports more expensive, thereby reducing the trade deficit.) But those shockingly high deficits of the early 1970s? A mere 0.1 percent and 0.5 percent of gross domestic product, respectively, in 1971 and 1972, a far cry from today's much larger 4.5 percent.

And yet the recent deficits have so far caused hardly a ripple of public concern. The conventional economic understanding used to be that a country running large trade deficits wouldn't be able to pay for all the products it imported. Paying for the imports would then require borrowing from other countries, which in turn would require making interest payments on foreign debt. Paying the interest on this debt would require earning more, and that would require exporting more--all of which ultimately would lead to a drop in the value of the national currency.

But the U.S.'s triumphalist economic view today is that "trade deficits no longer matter." This idea was once associated solely with the wilder shores of globalism. For example, it has long been a hobbyhorse of The Wall Street Journal's neoconservative editorial pages, and it achieved perhaps its most memorable articulation in a 1993 commentary by Kenichi Ohmae, a former McKinsey guru in Tokyo. "No one worries about trade balances between California and Texas" he said. "Why should they worry about the balance between the United States and Japan?" It was for comments like this that Michael Lewis dubbed Ohmae the "galloping globalist" These days, however, judging by the ennui with which papers like The New York Times and The Washington Post have treated the deteriorating trade trend, Ohmae's view has gone mainstream.

Is it really true that America's mounting trade deficits are not a problem? Hardly. The negative implications are legion. In fact, it may not be much of an overstatement to say that unless Washington can quickly reverse the trade trend--by exporting more and importing less--America's days as the world's leading economy are numbered. …